10 Questions and Answers About Bitcoin and the Blockchain

When I talk to people about Bitcoin, the first question I am asked is typically, “Is Bitcoin just a scam or a bubble?”, which is a great question. To me, there are two key point to consider when considering that question.

First, if someone in Venezuela or Zimbabwe was dealing with their currencies hyperinflation, they might think that Bitcoin looked like a stable store of value compared to what their government was offering. These are cases where Bitcoin (or more generally, cryptocurrencies) make sense from a current economic perspective.

Second, Bitcoin is the first example of blockchain technology. (More about blockchain in a moment.) Bitcoin’s value to blockchain is significant in that it is a proof of concept. Bitcoin has a combined market value of well over $100 billion depending on its current market price. While people have hacked some of the exchanges that trade Bitcoin, no one has hacked the Bitcoin blockchain. If someone did hack the blockchain, they would be able to get away with billions of dollars. So, based on this standard, the technology of blockchain looks very secure.

But, isn’t Bitcoin just for black market activity? Actually, Bitcoin and most other cryptocurrencies (cryptos) are very traceable based on their wallet ID’s. Governments did not initially understand this aspect of Bitcoin, but they are becoming more sophisticated about cryptos. In fact, governments may eventually want cryptos to replace the cash transactions (85% of all transactions world-wide are in cash) to make transactions more easily taxable.

What is blockchain? According to the Harvard Business Review, blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Or in other words, a secure public database to trace transactions and ownership.

Why does anyone care about blockchain? Blockchain has the potential to change the nature of trust. Traditionally, people have had no choice but to trust individuals and their institutions. For example, people have come to trust (to varying degrees) governments, banks, stock exchanges and similar institutions. As blockchain is outside the control of institutions that potentially subject to manipulation, trusting blockchain only requires trusting the program that runs the blockchain. That is why the fact that Bitcoin has operated for a decade without having its blockchain hacked is a big deal.

What are some examples of potential blockchain transformations? At the point that blockchain is more widely implemented, the following areas have been identified as potential area that could be disintermediated (like Amazon has done to retail) banking, stock markets, DNA sequencing projects, social media, property title registries and many others.

How would banking be disintermediated? Currently every time a non-cash transaction happens, a bank or other institution (Visa, PayPal, etc.) is involved in the transaction and takes a fee. With blockchain, the transaction would essentially be person to person with an enormous drop in fees.

How would social media (like Facebook) be impacted by blockchain? Currently Facebook knows everything about its users and is able to sell advertisers very targeted information for advertising purposes. With blockchain based social media, individuals will have much more control over their personal information and be able to use cryptocurrencies to facilitate micro-transactions to sell bits of their information. This model is fundamentally a distributed model which is the opposite of the current Facebook style social media.

When will we see blockchain transform these business models? This transformation is not a small task. Just as the Internet rapidly changed software packaging, but has taken years and decades to transform retail, initially blockchain is likely to impact areas that do not have a good solution in place like property title in developing nations. It could easily take years or decades to transform areas like banking and social media.

There seem to be a lot of cryptocurrencies. How many are there and why so many? There are currently over one thousand cryptos. The different cryptos have different characteristics that make them more or less interesting for specific uses. Some of the key characteristics include:

– Transactions per Second (TPS) – Bitcoin can handle about 2-3 TPS compared to the Visa network which handles tens of thousands of TPS. Ethereum can handle about 5-8 TPS, Litecoin about 30 TPS, and WAVE can handle over 100 TPS. EOS is in development and claiming it will be able to handle tens of thousands of TPS. Other cryptos are likely to come along with faster TPS capabilities.

Market Recognition – Just as most people around the world know and accept the US Dollar, Bitcoin has the most recognition amount cryptos, however, about the top 20 or 25 currencies currently have market caps over $1 billion. Most of the other 900 plus are likely not going to gain wide acceptance.

Smart Contracts – one of the capabilities of a few cryptos are smart contracts. Smart contracts allow agreements about digital activities to trigger the transfer of crypto money from one person’s wallet to another. Currently Ethereum (ETH) is the main crypto know for smart contracts. Others have this capability (like Bitcoin, Stellar) or have plans to offer it (like EOS).

Niche – most cryptos are focused on a specific niche. SALT is focused on lending against cryptocurrencies. Ripple is focused on being a tool for banks and payment providers. There are many possible niches.

Will there be a shakeout among cryptos? Most technologies go through a phase where there are lots of options and then a collapse where there are a small percentage of the original participants. In cars, there were dozens of car manufacturers at one time. Then the industry consolidated to the Big 3 in the US. The Internet in the 1990’s had many, many companies, but very few survived the dot-com crash in 2000. The same could easily happen with cryptos and blockchain.